China released its 2015, fourth quarter results on Tuesday; the fact that China’s economy is decelerating has been. In the last months of 2016 the Chinese economy was galloping at 6,9%, which brings us to an annualized GDP growth of 6,8%. These headline numbers are hardly the staff “crises” are made of around the world, but falling short of 7% was significant for China.
The deceleration of the Chinese economy is gradual, going from 9,5% in 2011, to 7,3% in 2014, to 6,8% in 2015; 6,3% is projected for 2016. Some suggest that quarterly and annualized figures are in fact too neat and too gradual. Using proxy growth indicators, such as electricity consumption, some estimate that 2014 growth was closer to 5,6% GDP growth or lower.
Putting things is perspective, China is a $10 trillion GDP economy, second only to the U.S. Were there to be a Chinese crisis, it would be global. But, China is still growing, so why is there so much panic. The answer is probably that the world is addicted to growth as much as China.
Chinese businesses borrow on assumption of growth for more than a generation. Millions make their way from the countryside to urban centers and the job market has been able to absorb them. By the same token, most commodity producing countries have run their economies on the basis of a constant underlying assumption that has held true for three decades, namely that China will growth. So, if China were not to grow, there would be contagion.
The first wave of contagion has been already evident. Commodity prices are tumbling, with oil prices at 12-year lows and a whopping 20% since December alone. The steel industry is shedding jobs globally and emerging market currencies are being constantly devalued . The soothing argument is that China is on a point of transition from emerging to a mature economy. That is not always verified by numbers, as for example the retail industry saw 11% deceleration in December. Even if there is a surge in the service sector, that is no consolation for commodity producers from Australia to Chile, and from Saudi Arabia to South Africa. Everyone has come to rely on Chinese demand. Slowing demand for emerging market commodities, in turn, has a knock-on effect on slowing demand for the range of consumer and capital goods of the kind that Europe exports. And because Europe is a major energy and commodity importer, like China, there is increased deflationary pressure that is impacting on growth. And most Central Banks is developed economies respond with zero or subzero interest rates, which is bad news for savers, pension funds and insurers.
The second wave of contagion would come from debt. By mid-summer, when Chinese deceleration triggered panic in capital markets, everyone was calculating Beijing’s debt exposure, private and public. In the beginning of 2015, China’s debt-to-GDP ratio stood at 282%, if one added private and public debt. Federal debt is not an issue and banks have been prudent. What the McKinsey Global Institute found worrying is the mortgage market, with houses that are now worth less than when the loans were taken out. In addition, there is a large shady finance sector – not banking finance – that is hard to consolidate. Major European banks, such as HSBC, are significantly exposed to China and if there is significant deleveraging the impact will no doubt be global.
Last but not least, the IMF has recently granted remnibi reserve currency status. China is currently accelerating the pace of globalizing its economy in an effort to see its economic leverage institutionalized. Through the Asian Infrastructure Investment Bank, China has been promoting the “One Belt, One Road” vision that will link its economy to the world, especially Europe. For instance, the European Commission’s plan to mobilize €315 bn of investment is very much predicated on Chinese investment. If anything, the crisis is emboldening China’s global outreach, especially in Central Eastern and Southeastern Europe.